Discretionary Active Fund Managers or Crystal Ball Psychics?

The idea that a discretionary active fund manager is well-equipped to deliver superior investment returns over an appropriate index benchmark is ridiculous. And the logic is actually surprisingly simple. A stock’s current price must reflect the aggregate view of all investors about a company’s future economic performance; for better or for worse. Why? Because if one investor were able to achieve superior returns by simply analysing a company’s annual report or any other financial statement, others would catch on and subsequently do the same. This is the reality of modern financial markets; price arbitrage and no easy profits. Thus, a stock’s current price must reflect all known information.

However, when new unexpected news is released about a company’s future economic performance, the aggregate view of investors may change and so will the price. But who knows when or what new news is on the horizon? The answer, is no-one! No-one can reliably predict the future. For example, no-one can reliably predict a future world conflict, what the US President might do–particularly the Trump administration–and even weather men and women cannot reliably predict the weather beyond a couple of days. This is the crux of the issue–by placing your faith in discretionary active fund managers, you are asking them to reliably predict the future economic outlook of not just one company, but several thousands! It is a ridiculous notion and is akin to seeking out a fortune-teller to unveil what the future holds for your life.

Instead, use science! The academic research in finance has provided the world with many robust, theoretically-sound and empirically-valid solutions. Embrace science over crystal gazing.